Building for the future
a new approach build. use. Grow. Builders Mutual is positioning for future opportunities with a new strategic plan to Build, Use, and Grow. During the past two years of declining premiums and a challenging construction and insurance market, we have been actively preparing for the future. The three key elements of our strategy are: Build: Implement significant enhancements to our infrastructure to better position the Company for the future Use: Maximize the investments in new technology and resources to leverage results and drive improvement in efficiency and effectiveness Grow: Return the Company to a position of profitable growth In alignment with our strategy and increased focus on expense management, we ve taken a new approach with the Annual. All policyholders received a condensed print version by mail of our 2009 results. The online version of the includes an enhanced financial summary and graphs as well as a detailed listing of our Board of Directors and Builders Mutual leadership. Building for the Future Together We believe that nobody knows the builders like Builders Mutual. And that s why we continue to offer free services like Builders University and risk management jobsite consultations. Our field and internal industry experts are committed to serving the building industry. We recently updated all of our online risk management resources in both English and Spanish, making it even easier for our customers to protect their bottom line and keep their workers safe. This year, more than ever, we are committed to growing our business. We are appointing new agents in the border states of Maryland and Mississippi. We ve expanded our appetite beyond residential and commercial contractors and trade contractors to include many construction-related businesses. Growth is critical to our success and we can t get there without you! Whether you are a customer, an agent, or a business partner we value your relationship and the strong reputation you ve enabled us to build over the past 25 years. 1
message to our policyholders John Boggs, CPA BMIC President and Chief Executive Officer 2009 was a very tough year for our policyholders, our agents and for the insurance industry. Builders Mutual s premiums declined by 32% as most of our policyholders simply did not have as much work. The premium decline was exacerbated by the soft insurance pricing cycle which made the competition for premium very challenging. Given the economic downturn, Builders Mutual managed to report a $10.5M profit and returned $1.3M in dividends to eligible WorkSafe policyholders. Builders Mutual continues to build its infrastructure with new systems and improved technology. Our goal is to be in position to capitalize when the housing market returns. Over the past few years, we created a new subsidiary and became licensed in four new markets. These marketing expansions along with improved technology have allowed us to be more competitive during this challenging economy. We remain committed to serving our policyholders in the construction industry and we are proud to return a dividend to our policyholders during these difficult times. Even though the economy is rough, there are two things you can count on: the housing market will recover and Builders Mutual will continue to support our policyholders as we have for the past 25 years. 2
Financial summary The following are statements of financial position and results of operations of Builders Mutual Insurance Group for the fiscal year ended December 31, 2009. The financial statements are presented in accordance with statutory accounting principles as required by the North Carolina Department of Insurance. Financial summary represents both Builders Mutual & Builders Premier Insurance Companies. The combination of the housing market, unemployment rates, and the soft insurance market continued to impact insurance carriers in 2009. Builders Mutual, despite a reduction in written premium of 31.7%, was still able to report a profit in 2009. Although reporting an underwriting loss of $2.1 million, a strong investment portfolio contributed to the reported net income of $10.5 million. A $1.3 million policyholder dividend has been paid to eligible workers compensation policyholders. As the Company s 25th anniversary celebration ends, Builders Mutual is proud to have returned policyholder dividends in 21 of those years totaling $45.9 million. Even in these tough economic times, we continue to put our policyholders first, and remain committed to building and maintaining long-term relationships with our policyholders and agents. FINANCIAL POSITION Assets Assets declined $16.8 million, or 3.4% to $470.9 million. This asset decline is from declining premium receivables and cash & short-term investments. Included in the reduction of cash & short-term investments is the redemption of a $12.0 million surplus note. The Company did invest an additional $6.0 million in equity securities. Total investments represent 88.3% of the Company s total admitted assets. We continue to invest heavily in fixed income securities, which are $377.8 million of total invested assets. Liabilities Our total liabilities decreased by $18.5 million, or 6.3% in 2009. Unpaid losses and loss adjustment expense reserves declined by $13.1 from favorable loss development on prior accident years and a decline in loss exposures. This favorable loss development is reflective of the safe working environments created by our policyholders with assistance from our Risk Management consultants. Unearned premium reserves declined $4.4 million from the impact the economy has had on our business. Policyholders Surplus Policyholders surplus grew $1.7 million in 2009, to $197.0 million. This surplus growth was from net income of $10.5 million and $4.7 million unrealized gains, net of tax on equity investments. Current year surplus was reduced by an increase in non-admitted assets and the redemption of a $12.0 million surplus note. The ability to grow policyholders surplus during these tough market conditions is a key factor in maintaining our A.M. Best A (Excellent) rating. 3
Financial summary results of operations The Company is reporting net income of $10.5 million for 2009. Our direct premium written decreased by 31.7% and net premium earned decreased by 32.2%. Workers compensation premium now represents 70% of our total premium compared to 63% in 2008. Even during these tough economic times, we continue to stay focused on maintaining a high quality book of business and do not sacrifice quality business to grow our revenue. Losses incurred declined in 2009 by $7.2 million. This decline is due to lower loss exposures on the current accident year and continued favorable development on prior accident years. The loss ratio increased to 59.2% for the current year compared to 45.9% reported in 2008. The increase in the loss ratio is due to the decline in net premium earned. We continue to manage operating expenses as evidenced by $5.2 million decline from the prior year. Total operating expenses incurred are $36.9 million for 2009 compared to $42.1 million last year. The decline in net premiums written in 2009 increased the expense ratio to 45.5% compared to 35.0% in 2008. Net investment income increased slightly in 2009 as the Company utilized some investment income generated to help fund current year operations and redeem the $12.0 million surplus note. Sales from fixed income securities generated realized capital gains, before tax of $642,000 compared to realized capital losses, before tax totaling $8.4 million in the prior year. 4
Financial summary balance sheet statement of income All figures represented in thousands (,000). All figures represented in thousands (,000). ASSETS 2009 2008 Bonds $377,807 $376,757 Common & preferred stocks $27,823 $15,521 Cash & short-term investments $10,156 $30,386 Premium balances $23,442 $29,547 Other assets $31,699 $35,511 Total Assets $470,927 $487,722 Liabilities & policyholders surplus Unpaid losses & loss adjustment expenses $231,612 $244,714 Unearned premiums $19,057 $23,419 Other liabilities $23,196 $24,222 Total Liabilities $273,865 $292,355 Total Policyholders Surplus $197,062 $195,367 Total Liabilities & Policyholders Surplus $470,927 $487,722 2009 2008 Premiums earned $85,346 $125,882 Losses and LAE incurred $50,538 $57,742 Underwriting expenses $36,880 $42,099 Underwriting gain $(2,072) $26,041 Net investment income earned $15,724 $15,479 Realized capital (losses)/gains $642 $(7,538) Other expenses/(income) $1,309 $1,527 Income before income taxes $12,985 $32,455 Policyholder dividends $1,300 $3,000 Federal income tax expense $1,166 $7,464 Net income $10,519 $21,991 changes in policyholders surplus Unassigned surplus, beginning of year $195,367 $190,666 Net income $10,519 $21,991 Net unrealized capital (losses)/gains $4,724 $(10,123) Change in net deferred income tax $763 $1,322 Change in non-admitted assets $(2,262) $(8,511) Change in surplus notes $(12,000) Other items $(49) $22 Unassigned Surplus, End of Year $197,062 $195,367 5
Financial summary Ratios profitability analysis 2009 2008 change Loss Ratio 59.2% 45.9% 13.3% Expense Ratio 45.5% 35.0% 10.5% Dividend Ratio 1.5% 2.4% -0.9% Combined Ratio 106.3% 83.3% 23.0% Operating Ratio 87.9% 71.0% 16.9% Loss Ratio: Losses + LAE / Net Premiums Earned Expense Ratio: Other Underwriting Expenses / Net Premiums Written Dividend Ratio: Policyholders Dividends / Net Premiums Earned Combined Ratio: Loss Ratio + Expense Ratio + Dividend Ratio Operating Ratio: Combined Ratio (Net Investment Income Earned / Net Premiums Earned) PREMIUMS EARNED $200M $150M $100M POLICYHOLDERS SURPLUS $200M $150M $100M $50M $50M dividend Builders Mutual distributed a $1.3 million dividend to over 6,500 0 2006 2007 2008 2009 POLICYHOLDERS SURPLUS 0 2006 2007 2008 2009 eligible WorkSafe policyholders. At a time when builders are challenged to reduce costs, it s clear they haven t reduced focus on safety. BMIC remains committed to jobsite safety with valuable services like risk management consultations, Builders University classes and new online safety programs. Our policyholders strong safety culture has allowed us to return over $45.9 million in dividends over the past 25 years. 6
2010 board of directors Rick Judson, Chairman Evergreen Home Builders Charlotte, NC David Stormont, Vice Chairman Kitty Hawk, NC Don Betsworth, Secretary/Treasurer Don Betsworth Homes, Inc. Summerfield, NC David Creech Creech Construction Co., Inc. Raleigh, NC Bill Daleure Crossland Group Charlotte, NC Nobody knows the builder like Builders Mutual Board of Directors. Closely connected to the building industry, BMIC s Board focuses on what s most important to our clients and their businesses. (From top, left to right) Dave McDonald, Bill Daleure, Willard Buddy Hughes, Frank Wiesner, Rick Judson, David Creech, Herschel Redding, Don Betsworth, Lyle D. Gardner, David Stormont, Robert Guthrie Lyle D. Gardner Spectrum Homes Raleigh, NC Robert Guthrie Raleigh, NC Williard Buddy Hughes Hughes Construction Co. Lexington, NC Dave McDonald JDM Consultants, LLC Charlotte, NC Herschel Redding Redding Construction Services, LLC Rural Hall, NC Frank Wiesner Olde South Homes Raleigh, NC officers & department directors John Boggs, CPA President/Chief Executive Officer Michael Gerber Senior Vice President/ Chief Marketing Officer Graeme Boddy Vice President/ Chief Information Officer Tom Lockard, CPA Vice President/Chief Financial Officer Charles Burton, SPHR Assistant Vice President of Human Resources Brad Moock, CPCU, CLU, CBIA Assistant Vice President of Business Development Gina Schwitzgebel, CPCU, CIC, ARM, AIC, AMIM Assistant Vice President of Underwriting Jerry Visintine, FCAS, MAAA Assistant Vice President of Actuarial Ron Adams, WCCL, CBIA, C-Mesh Director of Risk Management Michael Carter, CPCU, APA Director of Premium Audit Joe Frazier Director of IT Business Services Michele Hemric, CBIA Director of Training & Development Jerry Kaiser Director of Project Management Michelle King Director of Information Management Todd Quilici Director of IT Infrastructure Ken Shivar Director of Claims Laurie Trumbo Director of Premium Accounting Jodi Vedelli Director of Marketing 7